The first two parts of this series have looked at the private market for health insurance and the government programs. Medicare is essentially unchecked while Medicaid gets a whole lot stingier. The private market is allowed to exclude and underwrite in some circumstances while the federal government backs away from a lot of regulation.
The most fascinating part is the financing mechanism. Obamacare expanded coverage through a combination of generous tax credits and Medicaid expansion. The CBO scored that this expansion was paid for by a combination of cutting down on Medicare Advantage payments and a wide variety of taxes such as the medical device excise tax, the Cadillac plan tax, sun tanning tax, the reinsurance tax and income tax surcharges on high income individuals and families. The Hatch plan repealed Obamacare and all the taxes (interestingly, it also repeals a major student loan reform package, no mention of what is supposed to replace that system) but it claims to be deficit neutral so it has to pay for its limited subsidies somehow.
And the way it does is a doozy that immediately shows how politically not viable this proposal is:
Section 601: Capping the Exclusion of An Employee’s Employer-Provided Health Coverage
our proposal caps the tax exclusion for employee’s health coverage at 65 percent of an average plan’s costs. The value of employer-sponsored health insurance would be capped and indexed to grow at an annual rate of CPI +1.
So what does that mean?
My health insurance just got a whole lot more expensive for me. That is the short story. My health insurance according to box 12DD cost $13,000 last year to cover my entire family. That is 100% pre-tax dollars. This proposal would make some of that post-tax dollars. If average means average family plan, the average was $16,351 in 2013. 65% of that means $10,600 would be tax deductible. The remaining $5,800 for the average person in an average family plan would be taxable. Personally, I would be paying taxes on an additional $2,400 worth of compensation. Some people with expensive plans would be paying taxes on a new $7,000 or $10,000 compensation that they don’t see in cash. Most people would be paying taxes on significantly larger chunks of previously untaxed compensation.
Furthermore, in the out years, the value of the exclusion gets weaker as either the health plan stays within the budget constraint of CPI+1 by significantly paring back coverage, or the average health plan costs increase and all of those increases shift to taxed compensation. Again, this fits with the basic Republcian diagnosis of the “problem” that Americans have it too easy and too good and don’t have to worry about bankruptcy every time they blow out their knee while looking for their cat.
From a build the system from scratch perspective, this is not a bad idea. However, we aren’t building a system from scratch. We’re tweaking a legacy system. And given previous decisions, this translates into a massive tax increase for anyone who gets decent coverage through work and in the long run much lower acturial value of work provided coverage.